Real Investment Under Ambiguity: Evidence from Mergers and Acquisitions

Richard Herron and Yehuda Izhakian

Abstract

We empirically find that firms facing high ambiguity—Knightian uncertainty—make less organic investment and more merger and acquisition (M&A) bids, measured as propensity, count, and dollar value. Conversely, firms facing low ambiguity are likely M&A targets. The propensity and speed of deal completion increase in the spread between bidder and target ambiguity. All-stock bids are less likely from bidders facing high ambiguity, while all-cash deals are less likely for targets facing high ambiguity. Bidder ambiguity declines following deal completion, with bidders facing higher ambiguity have higher abnormal announcement returns and pay larger premia for targets facing low ambiguity.